Home Ego-nomics Key West Style
There was an article in The Washington Post late last year discussing the role of emotions in buying and selling real estate. People think they make calculated decisions when buying or selling a house, but research shows that emotions play as big a role as intellect.
The article stated that evidence is mounting that people set prices on real estate (especially homes) as much on ego and self-image as on an objective analysis of the market. This is where the term "sticky prices" comes from -- sellers who won't budge from their price demands or other contract terms to make a deal happen.
Research economists formerly believed that people made important economic decisions like robots by applying simple logic. But research over the past 20 years has shown otherwise.
“These studies have illuminated a few key concepts: Many people will pass up sure profits for illusory ones. Some will turn down profits if they believe someone else is unfairly profiting more. Some will even refuse to sell if they believe they may come to regret it, because fear of future regret can be as powerful a motivator as money in the pocket today.”
“In other words, people will cling to prices they recall from a brighter day, even when market conditions have changed; they will walk away from a sale if they feel the buyer is getting too good a deal at their expense; and they are terrified that [if they sell now] the market will rebound and they will feel like fools.”
The article went on to discuss the role of “loss aversion” -– the concept that people deny reality as it applies to something they greatly value when it declines in value, such as stock. They tend to hope that if they wait long enough that the value will return and that the loss they would incur will in fact never happen.
One of the first lessons I learned after I moved to Key West was that everyone here is an expert on real estate and that everyone knows the value of their neighbors' property. That means everybody knows what something was worth at a former point in time. But we are no longer at that point. This is a new time and old prices do not matter. But the loss aversion concept tells us that sellers tend to deny the new reality and hope that the declining market will go away and the old property values will return. So they find reasons not to sell—whether it is pricing or blaming their realtor for the failure to sell. They refuse to accept the fact that they may have to sell their property at a loss.
The article rightly pointed out that most people make rational dollars and cents decisions when buying routine items such as milk and eggs, but let their emotions get involved in potentially life-changing decisions such as buying or selling a home.
Hoping for a positive market gain will not make one happen. Changing Realtors will not create any new universe of buyers if the price is not competitive. I have recommended that potential sellers not sell in the current Key West market unless they have to sell. But for those who must sell, I urge them to set a realistic price target. I remind them by not selling they will increase their cost in the property by making monthly mortgage payments (principal, interest, taxes, and insurance), utility payments, and ongoing maintenance expenses. The cumulative cost of failing to price a property correctly could lead to financial disaster for some.
I previously wrote about why now is a time to buy in Key West (and I truly believe that). But I equally believe that sellers must not let their egos get in front of their rational thought processes when it comes to selling in the current market. When I worked at the RTC and we had to evaluate business decisions on multi-million dollar assets, my former boss would invariably comment: "Pigs get fat and hogs get slaughtered!" That phrase out to be posted to every would-be seller's refrigerator door.
You can checkout all Key West real estate listings by clicking the link on the title of this and any other blog I post or call me at 1-877-295-7099.